We decided to take a look at one of the big public utilities, Ameren, to see if it was a safe dividend stock for the years to come.
Born from the merger between two larger utilities companies (Union Electric Company and Central Illinois Public Service Company). Ameren is a power company based in St. Louis, Missouri.
Ameren (AEE) is a holding company with the following subsidiaries
Ameren Missouri - Electric generation, transmission, and distribution as well as natural gas distribution in Missouri
Ameren Illinois- Electric transmission, distribution, and natural gas distribution in Illinois
Ameren Transmission Company of Illinois (ATXI) - Electric transmission business in the Midcontinent Independent System Operator, Inc. (MISO)
The four segments of their business are
Ameren Illinois Electric Distribution
Ameren Illinois Natural Gas
Their core business consists of providing energy for Missouri, Illinois, and the other midwestern states. The bulk of revenues for Ameren are generated in Missouri, with Illinois trailing right behind. From 2018 to 2019 both Ameren Missouri and Ameren Illinois saw declining operating revenues. There was a dramatic 9.64% decline for Missouri while Illinois saw only a 1.9% decline.
One of the main reasons for which was due to a decline in energy consumption due to lower temperatures in 2019 versus 2018. Operating revenues are heavily linked to the climate of both Missouri and Illinois. Fluctuations in temperatures result in fluctuations in revenues as well and are one of the bigger risk factors for Ameren.
Prior to 2018 revenue growth was positive but slow, increasing by 0.4% from 2016 to 2017 and by 1.5% from 2017 to 2018. Ameren Illinois grew slightly faster at 1.5% and 1.9% during the same time periods.
If we look at the breakdown of operating revenues by customer type we’ll see that the majority of energy supplied is to residential clients. The consumption of energy by residential clients can vary depending on many external factors. Even slight changes in consumer behavior can ultimately lead to changes in operating revenue on the order of tens of millions. Ameren Missouri generates nearly $1.5Bn from residential and $1.1Bn from commercial clients while Ameren Illinois generates $848M and $497M from residential and commercial clients respectively.
From 2018 to 2019 Ameren Missouri and Ameren Illinois saw declines in operating revenue across nearly every customer segment. Prior to 2018, Ameren Missouri experienced a slight increase in their major customer segments (residential and commercial) while Ameren Illinois saw declines in those same segments. Overall, there aren’t any promising customer segments that have shown consistent gains over the past few years.
The largest source of energy for Ameren is coal at 63% of all energy supplied, followed by Nuclear at 23% and purchased power at 6.9%. From 2017 to 2018 they decreased their reliance on coal from 70% to 67% and from 2018 to 2019 it fell again to 63%.
Ameren has also committed to 700 megawatts of wind production by 2020 and 100 megawatts of solar production by 2027. The Clean Energy act as well as public pressure has spurred Ameren to accelerate their divestment from coal into other energy sources. As a result they will have to invest heavily in future infrastructure to maintain compliance and compete in this new regulatory environment.
Cited in their 10k, public opinion on coal and non-renewables has been one of the larger risk factors for Ameren. As public opinion shifts in favor of renewable energy sources, Ameren will be subject to increased regulatory scrutiny which generally results in higher capital expenditures and investment related to the pursuance of sustainable practices.
Much of Ameren’s business is done in or on residential property. The pandemic has posed a challenge to Ameren because the virus has resulted in the practice of social distancing which limits the ability of Ameren and it’s subsidiaries to perform work or maintenance on infrastructure. Much of this work has generally been postponed and will be conducted at a later date, but the delay has proven detrimental to Ameren’s forecasts.
As demonstrated in the period of 2018 to 2019, the change in energy consumption and prices can have dramatic impacts on the operating revenue of Ameren. It is expected that we will see continued fluctuations in energy prices due to climate change, and this could have an outsized impact on Ameren’s ability to forecast and plan for future revenues.
On February 19th, 2020, AEE was trading at $85.88 and as of July 30th it is at $79.55 representing a 7% decline. During the first quarter of 2019 there were earnings of $1.55Bn while during Q1 of 2020 revenues were $1.44Bn, representing another 7% decline. These factors coupled with the aforementioned risk factors show that AEE hasn’t entirely recovered from the effects of Covid-19.
During the past few years Ameren has seen their debt levels increase to all-time highs. This is not surprising as they have stated they are going to be increasing their investment in infrastructure and other capital intensive projects. In 2016 they had debt levels of $6.597 bn while in 2019 they are currently at $9.37 bn. Their debt grew 2% from 2016 to 2017, but then it jumped by 21% and 14% the following years. Their current debt to equity ratio stands at 1.14 compared to 0.98 in 2016.
Ameren has had a negative free cash flow for the past three years running. From 2017 to 2019 the negative free cash flow has over tripled from ($77M) to ($272M). This does not paint a favorable picture for future dividend growth.
Even with a declining free cash flow Ameren has slowly raised their dividends the past few years. They paid out $1.83, $1.90, and $1.98 per share in 2018, 2019, and 2020 respectively. The dividend has a 3-year growth rate of 4% and a 5-year growth rate of 3.84%. The current payout ratio is at 60.93% and their yield is at 2.49%.
Ameren’s heavy reliance on coal is an enormous risk for them and they know it. They have continued to invest in alternative sources of renewable energy, decreasing their reliance on coal by on average of 4% per year. However, it is unknown if they will be able to divest from coal fast enough while increasing their dividend payments. They have had negative FCF for the past couple of years as well as declining revenues in their core business. Given they are paying dividends at a yield below the norm for utilities, it is likely they will be able to continue to make payments, but increasingly unlikely that they will be able to increase their dividend payments at the current rate if you consider their risk factors and recent performance.